Credit Questions

In this post: We will tackle some of your concerns about credit cards and debt and take a look at some recent Investopedia Advisor Insights.

This is the Millennial Wealth Blog.

Are you feeling buried in DEBT?

Guess what? You are not alone. Earlier in 2017, U.S. household debt levels reached all-time highs, even higher than during the Great Recession. If you are struggling to make ends meet, you may find yourself in a very lonely and depressed state. You may also be considering some drastic measures to try and get out of your situation.

Borrowing Your Way Out of Debt

The idea to pay off credit cards or other debt with a personal loan comes up quite frequently. To many, it may make sense, but the truth of the matter is, You CAN’T borrow your way out of debt. With that being said, I think there are other options that are much better.

If you have excellent credit you may be able to get a personal loan starting at 4%, which, may be considerably better than the current APR you are paying, but if you have the credit to get a personal loan, you can probably qualify for a new credit card, such as the Chase Slate card, which will allow you to transfer your balance at 0%.

Some of the Chase Slate benefits:

An introductory 0% balance transfer APR offer, a $0 annual fee and a $0 balance transfer fee on transfers made within the first 60 days of account opening. (After that, it’s $5 or 5% of the amount transferred, whichever’s greater.) Requires only average credit. No penalty APR. Access to Chase’s Blueprint program, which lets you customize your own debt payoff plan and view your FICO credit score.

One of the best resources for comparing credit cards can be found on the Nerd Wallet website.
I recommend setting up a payment based on the term of the introductory offer and making sure the balance is paid by the end. For example, if you have $1000 balance that is on a 15 month 0% offer, you would make 15 monthly payments of about $67.
If the idea of having another credit card bothers you, I am a firm believer in a side hustle to generate more income to pay off your debt. Many of my clients have multiple income streams. Some drive for Uber or Lyft in their spare time for extra cash. Some run Etsy stores. A side hustle is a great way to make additional money, while only working when you want/ need to.

I Am A Victim

Maybe you are responsible with your credit but ended up a victim of fraud. This, too, is a common issue. According to WalletHub, 47% of U.S. cardholders were impacted by fraudulent activities in 2016. If you ever notice suspicious activity on any of your accounts, call the bank immediately. Fraud is a crime where the damage is amplified the more time that passes. Most banks offer credit/ debit card fraud protection that allows the consumer to be reimbursed for damages while the bank investigates the charges, but be quick to report it, as most banks only give you so long to report the fraud.

Some of the best ways to protect yourself against fraud are:

Keep your debit and credit cards in a safe place when not in use. Do not carry them with you, unless you intend to use it! It is easy to lose a card from your wallet that you never use…

Use the “credit” function when given the option on debit card purchases. This allows you to make transactions without entering your PIN and may provide some extra fraud protection from the card issuer.

Make sure to shred anything with personally identifiable information, such as account statements and bills.

When paying for an online purchase make sure the site is a reputable retailer and has security encryption. You will know this by looking at the web address and making sure it starts with https:// . The “s” means the site offers additional security encryption.

Never give your bank information out over the phone to anyone you didn’t call.

Thinking About Credit Restoration?

Credit restoration programs are usually offered by for profit companies selling their services to individuals in poor credit situations. They do not offer services that the individual couldn’t handle on their own, and they come at a price that somebody in poor credit health is typically unable to afford. If you are needing help with restoring your credit, I recommend talking to the NFCC. You can find their website here: https://www.nfcc.org/ . Be careful of “salesman” calling your phone touting their ability to repair your credit. You want to ask about their agency’s accreditation. If they are not an accredited non-profit you may be subject to a scam.

I Just Need a Fresh Start

Fresh Start Loans sound like a great product, right? Wrong! This is a type of lending product that targets individuals in poor credit situations, such as bankruptcy or individuals that have lost a home due to short-sale or foreclosure. There are many companies that offer Fresh Start loans that have different underwriting requirements and interest rates. Some companies do not require any certain credit score but the more credible lenders will require a credit check. Most companies just require verifiable income and may require a deposit for a secured loan. What most fresh start loans have in common are high-interest rates. There is nothing in this world that is so important to need to take a loan out at 35%. If this loan is to pay off other creditors, again I will say, “You can not borrow your way out of debt.” If you are in a place where your goal is to start building your credit, the absolute best way to accomplish your goal is to earn more money and save more money. When you are able to start saving money on a monthly basis you can start paying for items without needing credit. Your credit score does not matter if you are purchasing with cash, but if you are needing to make a large purchase at some point like an auto or a home with a loan, you will need a good credit history. Here is where your savings comes in… Once you have enough savings for emergencies set aside you can start focusing on building your credit. Go to your bank or a local credit union and talk to them about secured credit options, which is secured against a deposit at their institution. You will NOT use your emergency savings, but any additional savings. For instance, if you have an additional $500 saved over your emergency savings, of at least 3 months of expenses, the bank should be able to issue a secured credit line up to $500 that you would deposit in a savings account or certificate of deposit.

How can we pay off debt so we can focus on increasing our savings?
What is a good approach to paying off debt? My wife has $47,000 in student loan debt. We also owe $32,000 on a truck plus $152,000 for our mortgage. We have no credit card debt. Our income is around $4,300 net per month and we have around $50,000 in a checking account. Should I use some of our savings to pay off the debt? I am funding my 401(k) at 10% and would like to increase that amount. If the debt is paid down, this will be much easier.

A:
Great question! You definitely have the right mindset! I will do my best to help, knowing that I only see a very small piece of your overall financial picture.

Debt is one of the biggest risks to building wealth and getting it paid off should be a priority. I generally recommend categorizing your debts from highest interest to smallest to determine what debt payments to prioritize. If the $50,000 balance in your checking account is in addition to an emergency savings account with enough cash to cover 3 – 6 months of expenses, then, absolutely you should be putting that money to work. If the balance in checking is the entirety of your liquid savings, then I recommend moving enough to a dedicated savings account for emergencies to cover the 3 – 6 months of expenses. You can then take the difference and either pay down your debt or potentially invest it. To determine the best course of action, look at your interest rates on your debt. Keep in mind, paying off debt is one of the only guaranteed returns. Interest not paid is essentially interest earned. If your interest rates are higher than 5%, then I would say paying off the debt would be a good return in any market. If they are low to zero, then it may make sense to look at investing some cash.

Should my retirement account avoid dividend-paying stocks and ETFs?
I am 22 years old and have been employed full-time for three months now. I have a company match 401(k) that I contribute the max to in order to receive the full match contribution. When I checked out the account a couple weeks ago, I discovered that I was automatically invested in a mutual fund that had unnecessary fees and had drastically underperformed the S&P 500. I decided to take the account into my own hands and invest in it myself. Since I have a very long time horizon, I am looking to invest in ETFs that will grow my savings over the long-term. A lot of the ETFs that are offered through my 401(k) company offers minimal fees and provide dividends. Is there anything inherently wrong with having dividend funds in my retirement account? Does this increase the risk of my portfolio? Obviously, I will also be reinvesting the dividends as well. Does this sound like a useful strategy to grow my savings?

A:
Great job on getting your 401(k) contributions setup to get your full match! You are definitely on the right track! Dividends are really great, as they are an important part of compounding and may actually help reduce the risk in your portfolio. Most companies will have you auto-enrolled into your retirement plan with your contributions going into a target date fund that is based on your age and projected retirement date. A target date fund is typically a “fund of funds”, meaning, the fund’s portfolio is comprised of a handful of individual mutual funds or ETFs. The average target-date fund is 50+% more expensive than an average ETF due to active management. If you want to manage your own plan using ETFs, you can do well with the tools available in your plan. Having a diversified portfolio is very important to your long-term success. With that in mind, one of the best retirement hacks is to look at what investments are held within the target date fund’s portfolio and replicate the mix as best as possible with your available investment options. Pay attention to the asset categories like large cap stocks, short-term bonds, emerging markets, and so on. Be sure to set up an automatic rebalancing option to maintain your initial investment mix. Follow these steps and you can have a well-diversified retirement account that will keep your investment mix in balance and will keep more of your hard earned money working for you rather than paying for active management.

Is monthly income I receive from a divorce decree taxable?
The monthly income I receive is the outcome of my Divorce Decree. I receive 50% of my ex’s military retirement, which was considered “property” in the state in which we lived. It is not considered spousal support nor alimony. Is this income taxable?

A:
This is a great question! I actually consulted the DFAS Frequently Asked Questions to get their official answer, as I am not a tax professional nor do I give specific tax advice. You can explore their FAQ on the website here, https://www.dfas.mil/garnishment/usfspa/faqs.html

The answer to your question, as follows:

Are USFSPA retired pay as property payments taxable to the former spouse?

Yes, they are considered taxable income to the former spouse. DFAS is required to issue the former spouse a Form 1099-R each year reporting the former spouse’s portion of retired pay. USFSPA retired pay as property payments are also subject to federal income tax withholding (FITW). In some cases, the monthly retired pay amount will fall under the threshold for automatic FITW. There is no separate income tax reporting for alimony or child support payments made under the USFSPA. A former spouse may want to consult a tax professional concerning the reporting of USFSPA payments.

This answer was taken directly from the website of the Defense Finance and Accounting Service. They provide the payment services of the U.S. Department of Defense.

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